With all the talk about a possible recession a common question we’re getting is what impact that would have on housing prices.  The assumption most people make is that a recession will lead to a housing crash, due to their memories of the Housing Crisis of 2008-2009.  But if you look back over time 2008 was very much an outlier compared to other recessions – in most cases the housing market remained flat or even slightly appreciated during recessionary periods. 

There are entire books written about what caused 2008-2009 and why it was different, but here’s the quick version:

Because of it’s historical performance, housing was believed to reliably appreciate in value. 

In 2003, 85% of originations were “prime” lending products, so they followed common underwriting criteria.  Then volume slowed down significantly.  Rather than acknowledge that the housing market had reached a plateau due to affordability, the market shifted to “non-prime” products in an effort to force a continued drive for demand.  These products allowed for lower down payments (or no down payment at all) and lax underwriting standards in many cases not requiring income or asset verification. 

An underrated part of these non-prime loans were the number of them that were interest-only or negatively amortizing.  The payment on these were much lower, but they didn’t pay down the principal loan balance (and in the case of the neg am loans, the loan balance increased with each payment). Not a great loan feature when there’s no down payment required.  From 2004 until 2006, the use of these loans also sharply increased

And it’s important to note that those low introductory payments didn’t last forever.  Eventually the payment adjusted to a full principal & interest payment, which drastically increased the monthly housing cost.  A large amount of those programs had the adjustment date after about 2-3 years.  That means that a wave of payments spiked between 2006-2009.

This is an oversimplification of a complicated issue, but the short version is when activity peaked in 2003 there was a massive push between 2004-2006 to “make it easier” to buy a home through loan programs that didn’t require down payment, verification of income, or even full principal & interest payments.  The justification for this was the belief that housing prices could only go up, and these products tested that theory (obviously it didn’t end well).  Going back to the home price appreciation graph, you’ll notice that the majority of the price correction was giving back the gains from 2004-2006.

How does that compare to today?  We’re in a comparable position as 2003 – activity has slowed and as much as the real estate market would like to get things moving, there’s limitations in how to accomplish that.  The big difference is that the loan programs from 2004-2006 have been regulated out of existence, so housing prices going forward will be primarily driven by affordability, supply, and demand.  Each market is different (I’ll touch on that next week), but on a national level most housing experts are projecting flat or moderate appreciation in housing – the pace of appreciation will slow because it has to, but the expectation nationally is for prices to level off rather than drop.